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Strategizing the Value Chain

By Shlomo Maital

   Amazon just announced it will create its own package delivery service, to compete with Fedex and UPS.  

   Amazon stock fell on the announcement – but this has happened before, each time Jeff Bezos has a new and costly idea, which usually prove correct.

    This strategic move suggests a key principle for startups: How to strategic the value chain.

     For on-line retailing, a significant chunk of the total profits in the whole ecosystem accrues to those who deliver the packages, not just those who make the products or sell them. Amazon is greedy for these profits, accruing to Fedex UPS and DHL and wants to swallow them.

       Every product or service is part of a complex value chain ecosystem. Each startup, pushing an innovation or creative idea, must ask:

         Where is my product or service aiming,   in the existing value chain?

The key is: Do NOT necessarily aim at where the money (big profit margins) are at the moment. Aim where they will be in 2-3 or 5 years.   And second: Maybe, just maybe, aim at an entry point that the other players do NOT find that attractive (e.g. Teva Pharmaceuticals long ago aimed at generic drugs, when Big Pharma was scorning this industry).   Use this to get your foot into the door. Once you are there, have cash flow, revenue, profit – and name recognition —   consider migrating, to another spot in the value chain, as Amazon is doing and has done constantly —   books to other products to all products, to cloud to original TV content….

     So to sum up: Startup entrepreneurs – analyze CAREFULLY the existing value chain. Draw it, picture it, analyze it.   Where are you aiming at with your product? Is this an ideal entry point?   Why? Where will you migrate AFTER you make a successful entry?  

          This is a bit like an uninvited guest knocking on the door and sticking their foot into the door to prevent it from being closed. Once you get in – look around, carefully, and figure out which room you will visit next.

             This value chain analysis is crucial and is based on a long-range plan and vision.   Many startups don’t bother, or are not even aware they have to do this right from the start.  

      IBM thought the true value in computers was in hardware.  Microsoft’s WINDOWS saw the value was in software and operating systems.  The rest is history.